TMX Group Limited Reports Record Quarterly Earnings Per Share for Q2/17

• Record quarterly diluted earnings per share of $1.19 in Q2/17, up 11% from Q2/16
  
  
• Record quarterly adjusted diluted earnings per share of $1.26 in Q2/17, up 2% compared with Q2/16
  
  
• Revenue of $190.3 million in Q2/17, down 2% compared with Q2/16
  
  
• Revenue up 3% in Q2/17 over Q2/16, excluding divested and de-consolidated businesses

TORONTO, Aug. 9, 2017 /CNW/ - TMX Group Limited [TSX:X] ("TMX Group") today announced results for the second  quarter ended June 30, 2017.

Commenting on the second quarter of 2017 and looking towards the future, Lou Eccleston, Chief Executive Officer of TMX Group, said:

"The significant operational highlights and record profitability of this past quarter serve to underline the profound fundamental strength of TMX Group's business model. Throughout the first half of 2017, our results continued to reflect the benefits of increased upward momentum across our business, a streamlined organizational structure designed to generate profitable growth and increased shareholder returns and a talented team of people that are consistently executing our plans. As we look ahead, TMX Group remains committed to enabling client success across all of our markets, while continuing to pursue exciting new initiatives for the future."

Commenting on operating performance in the second quarter of 2017, John McKenzie, Chief Financial Officer of TMX Group, said:

"We were very pleased to report record quarterly earnings per share this past quarter.  While we reported a 2% decrease in revenue, our top line actually grew by 3% when excluding the impacts from selling Razor Risk and TMX Atrium as well as de-consolidating BOX.  There was solid revenue growth in fixed income, derivatives and energy trading as well as in revenue from CDS.  We continued to reduce costs as reflected in the 8% decline in operating expenses before strategic re-alignment expenses, which reflected the impacts from selling businesses and not consolidating BOX.  All of this contributed to records in income from operations, which was up 7% over the second quarter of last year, as well as in our diluted earnings per share."

RESULTS OF OPERATIONS

Non-IFRS Financial Measures

Adjusted earnings per share and adjusted diluted earnings per share are non-IFRS measures and do not have standardized meanings prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other companies.  We present adjusted earnings per share and adjusted diluted earnings per share to indicate ongoing financial performance from period to period, exclusive of a number of adjustments.  These adjustments include amortization of intangibles related to acquisitions, non-cash impairment charges, write-off of deferred income tax assets, increase in deferred income tax assets resulting from capital loss carryback and strategic re-alignment expenses.  Management uses these measures, and excludes certain items, because it believes doing so results in a more effective analysis of underlying operating and financial performance, including, in some cases, our ability to generate cash.  Excluding these items also enables comparability across periods.  The exclusion of certain items does not imply that they are non-recurring or not useful to investors.

Additional IFRS Measures

Income from operations before strategic re-alignment expenses and income from operations are important indicators of TMX Group's ability to generate liquidity through operating cash flow to fund future working capital needs, service outstanding debts and fund future capital expenditures.  The intent of these performance measures is to provide additional useful information to investors and analysts; however, these measures should not be considered in isolation.

BOX (BOX Holdings)

In January 2015, BOX launched a program to incent subscribers to provide liquidity. In exchange for providing this liquidity and a nominal cash payment, subscribers received volume performance rights (VPRs), which are comprised of Class C units of BOX and an order flow commitment. The VPRs vest over 20 quarters of the 5-year order flow commitment period if minimum volume targets are achieved. If a subscriber fails to meet its minimum volume targets, its VPRs are available for reallocation to those subscribers that exceed their minimum volume targets, if any. Those VPRs may vest earlier. In September 2015, the VPR program was granted regulatory approval by the Securities Exchange Commission (SEC). Pursuant to the terms of the VPR program, subscribers became entitled to immediate economic participation in BOX for VPRs held.

As of July 1, 2016, we determined that we did not hold majority voting power on the board of directors as Class C units in certain vested VPRs became entitled to vote at board meetings.  As of this date, we no longer consolidated BOX as we ceased to hold the majority of voting power on the board of directors and exercise control.  As a result our financial results from July 1, 2016 forward do not include the results of BOX other than our share of BOX's net income (loss), which is reflected in Share of net income (loss) from equity accounted investees.  For periods prior to July 1, 2016 our financial results include the results from BOX on a consolidated basis.

Effective July 1, 2016, Derivatives revenue also includes revenue from licensing SOLA technology and providing other services to BOX.  This revenue was previously eliminated when BOX's operating results were consolidated in our financial statements.

Three Months Ended June 30, 2017 Compared with Three Months Ended June 30, 2016

The information below reflects the financial statements of TMX Group for the quarter ended June 30, 2017 compared with the quarter ended June 30, 2016.

 

Net income attributable to TMX Group shareholders

Net income attributable to TMX Group shareholders in Q2/17 was $66.5 million, or $1.20 per common share on a basic basis and $1.19 per common share on a diluted basis, compared with a net income of $58.3 million, or $1.07 per common share on a basic and diluted basis, for Q2/16. The increase in net income in Q2/17 reflected significantly lower operating expenses before strategic re-alignment expenses, partially offset by lower revenue, and no strategic re-alignment expenses.  There was also a decrease in income tax expense of approximately $2.4 million relating to a capital loss carryback, which increased net income in Q2/17.  In addition, we incurred lower net finance costs in Q2/17 compared with Q2/16. The increases in diluted earnings per share were partially offset by the impact from an increase in the number of weighted-average common shares outstanding in Q2/17 compared with Q2/16.

 

Adjusted Earnings per Share ⁵ Reconciliation for Q2/17 and Q2/16  

The following is a reconciliation of earnings per share⁶ to adjusted earnings per share⁷:

 

Adjusted diluted earnings per share increased by 2% from $1.23 in Q2/16 to $1.26 in Q2/17.  The increase in adjusted diluted earnings per share reflected significantly lower operating expenses before strategic re-alignment expenses, excluding amortization of intangibles related to acquisitions, partially offset by lower revenue.  In addition, we incurred lower net finance costs in Q2/17 compared with Q2/16. The increases were partially offset by the impact from an increase in the number of weighted-average common shares outstanding in Q2/17 compared with Q2/16.

 

Revenue

In 2015, we undertook a strategic realignment of our operations and revised our reporting segments information for the year ended December 31, 2015. In Q4/16 we further revised operations and our reporting for our Efficient Markets operating segment.  This segment has been separated into Equities and Fixed Income Trading and Clearing and Energy Trading and Clearing.  Effective Q4/16, we now report revenue in the following categories:

• Capital Formation
  
  
• Equity and Fixed Income Trading and Clearing
  
  
• Derivatives Trading and Clearing
  
  
• Energy Trading and Clearing
  
  
• Market Insights
  
  
• Other (includes Market Solutions, which was previously reported with Efficient Markets)

Results for Q2/16 have been restated to conform to this new structure.

 

Revenue was $190.3 million in Q2/17, down $4.3 million or 2% compared with $194.6 million in Q2/16 largely attributable to a decline in Market Insights revenue reflecting both a $2.1 million decrease in revenue from Razor Risk (sold on December 31, 2016), and a $4.4 million decrease in revenue from TMX Atrium (sold on April 30, 2017).  Revenue for Q2/17 increased by 3% over Q2/16, excluding the Razor Risk and TMX Atrium businesses and the $3.4 million net impact from de-consolidating BOX (effective July 1, 2016).   Other revenue also declined primarily due to recognizing higher net foreign exchange losses in Q2/17 on U.S. dollar and other non-Canadian denominated net monetary assets compared with Q2/16.  The decreases in revenue were somewhat offset by increases in Fixed Income Trading and CDS revenue, Derivatives Trading and Clearing revenue from MX and CDCC, as well as Energy Trading and Clearing revenue.

Operating expenses before strategic re-alignment expenses

 

Operating expenses before strategic re-alignment expenses in Q2/17 were $98.7 million, down $8.2 million or 8%, from $106.9 million in Q2/16. There were reduced costs related to Razor Risk and TMX Atrium of approximately $3.5 million and approximately $5.5 million respectively, as well as lower compensation and benefits costs (including employee performance incentive plan costs) of approximately $3.1 million related to our strategic re-alignment initiative.  Effective July 1, 2016, we excluded operating expenses related to BOX when we ceased to consolidate BOX's results from operations, a net reduction of approximately $3.5 million.  The decreases in costs were partially offset by approximately $4.1 million of higher employee performance incentive plan costs and increased severance costs (not included as part of strategic re-alignment expenses). There was also a write-off of $0.8 million related to discontinued products as well as increased Information and trading systems project costs in Q2/17

Additional Information

Income tax expense and effective tax rate

 

• In Q2/17, we carried back capital losses related to the sale of Razor Risk (sold December 31, 2016) against capital gains from the sale of PC Bond in 2013. As a result, there was a decrease in income tax expense of approximately $2.4 million for Q2/17, which reduced our effective tax rate.
  
  
• Excluding the impact from the above, the effective tax rate would have been approximately 26% for Q2/17 in line with Q2/16.

Six Months ended June 30, 2017 Compared with Six Months ended June 30, 2016

The information below reflects the financial statements of TMX Group for the six months ended June 30, 2017 compared with the six months ended June 30, 2016.

 

Net income attributable to TMX Group shareholders

Net income attributable to TMX Group shareholders in 1H/17 was $113.8 million, or $2.06 per common share on a basic basis and $2.04 per common share on a diluted basis, compared with a net income of $104.6 million, or $1.92 per common share on a basic and diluted basis, for 1H/16. The increase in net income in 1H/17 reflected higher revenue, significantly lower operating expenses before strategic re-alignment expenses and no strategic re-alignment expenses.  There was also a decrease in income tax expense of approximately $2.4 million relating to a capital loss carryback, which increased net income in 1H/17. In addition, we incurred lower net finance costs in 1H/17 compared with 1H/16.  The increases were partially offset by a non-cash income tax adjustment of $2.9 million relating to the write off of deferred income tax assets and a non-cash impairment charge of $4.8 million, both amounts related to TMX Atrium.  There was also an unfavorable impact on basic and diluted earnings per share from an increase in the number of weighted-average common shares outstanding in 1H/17 compared with 1H/16.

 

Adjusted Earnings per Share Reconciliation for Six Months ended June 30, 2017 and Six Months ended June 30, 2016 ¹⁵

The following is a reconciliation of earnings per share to adjusted earnings per share:

 

Adjusted diluted earnings per share increased by 7% from $2.22 in 1H/16 to $2.38 in 1H/17.  The increase in adjusted diluted earnings per share reflected higher revenue and significantly lower operating expenses, before strategic re-alignment expenses, excluding amortization of intangibles related to acquisitions. In addition, we incurred lower net finance costs in 1H/17 compared with 1H/16. The increase in basic and diluted earnings per share were partially offset by the impact from an increase in the number of weighted-average common shares outstanding in 1H/17 compared with 1H/16.

 

Revenue

Results for the six months ended June 30, 2016 have been restated to conform to the new structure discussed above.

 

Revenue was $376.4 million in 1H/17, up $4.1 million or 1% compared with $372.3 million in 1H/16.  There were increases in Capital Formation, Equities and Fixed Income Trading and Clearing, and Energy Trading and Clearing revenue, which were offset by a decline in Derivatives Trading and Clearing from de-consolidating BOX, and a decline in Market Insights revenue reflecting both a $2.7 million decrease in revenue from Razor Risk (sold on December 31, 2016) and a $4.6 million decrease in revenue from TMX Atrium (sold on April 30, 2017).  Revenue for 1H/17 increased by 5% over 1H/16, excluding the Razor Risk and TMX Atrium businesses and the $6.5 million net impact from de-consolidating BOX (effective July 1, 2016).  The decrease in Other revenue was primarily due to reclassifying revenue from BOX's regulatory entity from Other revenue to Derivatives Trading and Clearing revenue effective July 1, 2016, partially offset by an increase from recognizing lower net foreign exchange losses on U.S. dollar and other non-Canadian denominated net monetary assets in 1H/17 compared with 1H/16.

Operating expenses before strategic re-alignment expenses

 

Operating expenses before strategic re-alignment expenses in 1H/17 were $203.4 million, down $10.2 million or 5%, from $213.6 million in 1H/16.  There were lower compensation and benefits costs (including employee performance incentive plan costs) of approximately $6.3 million related to our strategic re-alignment initiative, as well as reduced costs related to Razor Risk (sold December 31, 2016) and TMX Atrium (sold April 30, 2017) of approximately $7.0 million and approximately $5.8 million respectively.  Effective July 1, 2016, we excluded operating expenses related to BOX when we ceased to consolidate BOX's results from operations, which were approximately $7.6 million in 1H/16.  The decreases in costs were partially offset by approximately $9.7 million of higher employee performance incentive plan costs and increased severance costs (not included as part of strategic re-alignment expenses).  There were also one-time contract termination fees of $0.8 million, a write-off of $0.8 million in costs related to discontinued products as well as increased Information and trading systems project costs in 1H/17.

Additional Information

Impairment charges

 

• In Q1/17 we determined that the fair value of TMX Atrium was below its carrying value, resulting in impairment charges relating to the write-down of goodwill.  In February 2017, we entered into an agreement to sell TMX Atrium.  The transaction closed on April 30, 2017 (see INITIATIVES AND ACCOMPLISHMENTS - Market Insights in our Q2 2017 MD&A), and there was no material gain or loss on sale in Q2/17.

Income tax expense and effective tax rate                         

 

• Excluding adjustments, primarily relating to the items noted below, the effective tax rate would have been approximately 27% for 1H/17 in line with 1H/16.
  
  
• In 1H/17, we wrote-down $2.9 million of deferred tax assets relating to TMX Atrium, which increased our effective tax rate and income tax expense. 
  
  
• In 1H/17, we incurred non-cash impairment charges of $4.8 million related to TMX Atrium, which also increased our effective tax rate.
  
  
• Offsetting these adjustments, in 1H/17, we carried back capital losses related to the sale of Razor Risk (sold December 31, 2016) against capital gains from the sale of PC Bond in 2013.  As a result, there was a decrease in income tax expense of approximately $2.4 million, which reduced our effective tax rate.  

FINANCIAL STATEMENTS GOVERNANCE PRACTICE

The Finance & Audit Committee of the Board of Directors of TMX Group (Board) reviewed this press release as well as the Q2/17 unaudited condensed consolidated interim financial statements and related Management's Discussion and Analysis (MD&A) and recommended they be approved by the Board of Directors.  Following review by the full Board, the Q2/17 unaudited condensed consolidated financial statements, MD&A and the contents of this press release were approved.

CONSOLIDATED FINANCIAL STATEMENTS

Our Q2/17 unaudited condensed consolidated interim financial statements are prepared in accordance with IFRS and are reported in Canadian dollars unless otherwise indicated. Financial measures contained in the MD&A and this press release are based on financial statements prepared in accordance with IFRS, unless otherwise specified and are in Canadian dollars unless otherwise indicated. 

ACCESS TO QUARTERLY MATERIALS

TMX Group has filed its Q2/17 unaudited condensed consolidated interim financial statements and MD&A with Canadian securities regulators.  These documents may be accessed through www.sedar.com, or on the TMX Group website at www.tmx.com.  We are not incorporating information contained on the website in this press release. In addition, copies of these documents will be available upon request, at no cost, by contacting TMX Group Investor Relations by phone at (416) 947-4277 or by e-mail at TMXshareholder@tmx.com.

CAUTION REGARDING FORWARD-LOOKING INFORMATION

This press release of TMX Group contains "forward-looking information" (as defined in applicable Canadian securities legislation) that is based on expectations, assumptions, estimates, projections and other factors that management believes to be relevant as of the date of this press release. Often, but not always, such forward-looking information can be identified by the use of forward-looking words such as "plans", "expects", "is expected", "budget", "scheduled", "targeted", "estimates", "forecasts", "intends", "anticipates", "believes", or variations or the negatives of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved or not be taken, occur or be achieved. Forward-looking information, by its nature, requires us to make assumptions and is subject to significant risks and uncertainties which may give rise to the possibility that our expectations or conclusions will not prove to be accurate and that our assumptions may not be correct.

Examples of forward-looking information in this press release include, but are not limited to, statements related to cost reductions, strategic realignment expenses and TMX Group's business integration initiative, factors relating to stock, derivatives and energy exchanges and clearing houses and the business, strategic goals and priorities, market conditions, pricing, proposed technology and other initiatives, financial results or financial condition, operations and prospects of TMX Group which are subject to significant risks and uncertainties. These risks include: competition from other exchanges or marketplaces, including alternative trading systems and new technologies, on a national and international basis; dependence on the economy of Canada; adverse effects on our results caused by global economic conditions or uncertainties including changes in business cycles that impact our sector; failure to retain and attract qualified personnel; geopolitical and other factors which could cause business interruption; dependence on information technology; vulnerability of our networks and third party service providers to security risks, including cyber attacks; failure to  properly identify or implement our strategies; regulatory constraints; constraints imposed by our level of indebtedness, risks of litigation or other proceedings; dependence on adequate numbers of customers; failure to develop, market or gain acceptance of new products; failure to effectively integrate acquisitions to achieve planned economics or divest under- performing businesses; currency risk; adverse effect of new business activities; not being able to meet cash requirements because of our holding company structure and restrictions on paying  dividends; dependence on third-party suppliers and service providers; dependence of trading operations on a small number of clients; risks associated with our clearing operations; challenges related to international expansion; restrictions on ownership of TMX Group common shares; inability to protect our intellectual property; adverse effect of a systemic market event on certain of our businesses; risks associated with the credit of customers; cost structures being largely fixed; the failure to realize cost reductions in the amount or the time frame anticipated; dependence on market activity that cannot be controlled; the regulatory constraints that apply to the business of TMX Group and its regulated subsidiaries, costs of on exchange clearing and depository services, trading volumes (which could be higher or lower than estimated) and revenues; future levels of revenues being lower than expected or costs being higher than expected.

Forward-looking information is based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions in connection with the ability of TMX Group to successfully compete against global and regional marketplaces; business and economic conditions generally; exchange rates (including estimates of the U.S. dollar-Canadian dollar exchange rate), commodities prices, the level of trading and activity on markets, and particularly the level of trading in TMX Group's key products; business development and marketing and sales activity; the continued availability of financing on appropriate terms for future projects; productivity at TMX Group, as well as that of TMX Group's competitors; market competition; research and development activities; the successful introduction and client acceptance of new products; successful introduction of various technology assets and capabilities; the impact on TMX Group and its customers  of various regulations; TMX Group's ongoing relations with its employees; and the extent of any labour, equipment or other disruptions at any of its operations of any significance other than any planned maintenance or similar shutdowns.

While we anticipate that subsequent events and developments may cause our views to change, we have no intention to update this forward-looking information, except as required by applicable securities law. This forward-looking information should not be relied upon as representing our views as of any date subsequent to the date of this press release.  We have attempted to identify important factors that could cause actual actions, events or results to differ materially from those current expectations described in forward-looking information. However, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended and that could cause actual actions, events or results to differ materially from current expectations. There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking information. These factors are not intended to represent a complete list of the factors that could affect us.  A description of the above-mentioned items is contained under the heading Risks and Uncertainties in the 2016 Annual MD&A.

About TMX Group (TSX:X)

TMX Group's key subsidiaries operate cash and derivative markets and clearinghouses for multiple asset classes including equities, fixed income and energy. Toronto Stock Exchange, TSX Venture Exchange, TSX Alpha Exchange, The Canadian Depository for Securities, Montréal Exchange, Canadian Derivatives Clearing Corporation, NGX, Shorcan, Shorcan Energy Brokers, AgriClear and other TMX Group companies provide listing markets, trading markets, clearing facilities, depository services, data products and other services to the global financial community. TMX Group is headquartered in Toronto and operates offices across Canada (Montréal, Calgary and Vancouver), in key U.S. markets (New York, Houston) as well as in London, Beijing and Singapore. For more information about TMX Group, visit our website at http://www.tmx.com. Follow TMX Group on Twitter: @TMXGroup.

Teleconference / Audio Webcast

TMX Group will host a teleconference / audio webcast to discuss the financial results for Q2/17.

Time: 8:00 a.m. - 9:00 a.m. ET on Thursday, August 10, 2017

To teleconference participants: Please call the following number at least 15 minutes prior to the start of the event.

The audio webcast of the conference call will also be available on TMX Group's website at www.tmx.com, under Investor Relations.

Teleconference Number: 647-427-7450 or 1-888-231-8191

Audio Replay: 416-849-0833 or 1-855-859-2056

The passcode for the replay is 52272683.

SOURCE TMX Group Limited

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